Can burned-out SRO housing units be saved?

A building with a (great) taco place, and a greatly missed neighborhood hardware store burned down, and the residential hotel next door (with a legendary historic neighborhood bar on the ground floor) was badly damaged.

The Graywood Hotel has been gutted and awaits a speculator

The bar, the 3300 Club, had insurance and the owners said they would reopen. The SRO, by law, has to offer existing tenants the right to return (at comparable rent) after the place is repaired.

The problem with that law is that if a landlord waits long enough, the tenants tend to vanish – they leave town, they find other (more expensive) places, they wind up on the streets and are hard to contact. So the owner can say: Gee, we tried, but none of the former tenants came forward to ask for their places back.

And now, the building owner, Dipak Patel, is putting the place up for sale – and advertising that the bar will be gone, the taco shop will be gone … and there’s money to be made converting it to a place that the previous tenants won’t ever be able to afford.

The listing notes that the property is “subject to residential tenants’ rights” but that it “represents an opportunity for a developer to reconfigure rooms to maximize square footage and income.”

Doesn’t sound like a pitch for rebuilding and SRO.

The building permits for the emergency cleanup list the place as a “tourist hotel/motel,” which is wrong: Only six of the units are legally licensed as tourist rentals. The rest are – or should be – protected by the city’s Residential Hotel Conversion Ordinance.

The law is pretty clear: Even if there’s a fire and a place has to be demolished (which this place does not), you can’t replace SRO rooms with any other type of use. So the real-estate investors who buy the place have to keep its use.

But there’s a lot of movement these days to create upscale SROs that can be rented to young tech workers at a much higher price than the former residents paid. That may be what the “reconfigure rooms” line is about.

The asking price is $3.5 million. Not bad for a place that last sold, city records show, for $1.6 million in 2004.

Let’s see. Buy the place for 3.5 mil, borrow 3 mil of that, and you’re looking at an $18,000 a month mortgage (based on today’s rates and a simple online mortgage calc program.

There are 28 legal units in the place, 22 SRO and six tourist hotel rooms. Do the math:

Many of the previous tenants were paying a rent-controlled rate in the neighborhood of $500-$1,000 a month for their rooms. Those rooms can easily be fixed up and rented for more than twice that.

You pay $3.5 mill and rent to the original tenants at the original rent and – with the cost of renovations and property taxes – you aren’t going to make a lot of money. Rent to new tenants, at market rate (at least $2,000 a month and probably more) and you have a really nice investment.

But it only works if you make sure that most of the original tenants never come back.

Which is what some of us worried about the night of the fire. Right of return means nothing unless someone (the city) finds the original tenants, makes sure they know about their rights, tells any potential investor that the place can’t be altered to make the rooms more expensive than they were before, and really enforces the law.

Sup. Hillary Ronen, who represents the district, told me she is “watching that building like a hawk.” That’s the only way this can turn out well.